The implementation and impacts of China's largest payment for ecosystem services program as revealed by longitudinal household data

•China has been retiring degraded cropland and expanding forest covers.•Changes in land use have accelerated labor transfer into off-farm sectors.•Farming has been intensified to offset the effects of cropland reduction.•Average household income increased by 250%, leading to large reduced poverty. As the largest payment for ecosystem services initiative in the developing world, China's Sloping Land Conversion Program subsidizes households to restore marginal croplands and other degraded fields. While it has attracted broad attention, many questions regarding its performance remain unanswered. Using descriptive and econometric analyses based on a longitudinal dataset containing a large number of surveyed households over 1999–2008, we examine the multi-faceted changes in program enrollment, land and labor allocation, agricultural production, and income structure and inequality. We find that the program has affected land use substantially by simultaneously retiring degraded cropland and increasing forest and vegetation covers, which have accelerated labor transfer into off-farm sectors. Meanwhile, households have intensified agriculture by increasing their production expenditures, enabling them to offset some of the negative effects of the cropland set-aside and reduced farm labor use. While the subsidies have been a significant source of income to the participants, most households have had a larger portion of their income come from non-farming jobs, leading to the increase of average family income by over 250%, and the reduction of rural poverty and thus the most vulnerable population. As impressive as these changes may be, the program still faces great challenges before the ecosystems are adequately recovered to provide their services.